United States: Libya: Recent Developments Impacting Foreign Investment

This article orginally appeared in Texas Journal of Oil, Gas, and Energy Law

With 39.1 billion barrels in proven reserves,¹ Libya is the country with the ninth-largest proven oil reserves, and its oil industry remains the country’s biggest draw for foreign investors. Libya is a major producer of light crude oil, the kind favored by oil refineries because of its low wax content and ease of transportation and refining. For U.S. companies, the race to Libya started slowly, not only because of slower than anticipated developments politically, but also because of the head start that many European counterparts had before the U.S. fully normalized relations with the former pariah state. In fact, full normalization of relations did not occur until May 2006, when the United States announced its intention to restore full diplomatic relations by establishing an embassy in Tripoli and removing Libya from the State Department’s list of designated state sponsors of terrorism.²

For those who have never visited Libya before, reminders of its status as a third-world nation abound. There is only one Westernstandard, five-star hotel in Tripoli, the capital, and visas to the country can be difficult to obtain without an official invitation from the government. Libya also has an extreme shortage of office space and skilled workers, with unemployment figures reportedly at least 15 percent³ in 2005 and as high as 30 percent in 2004 according to the CIA World Factbook.⁴ However, for those who have regularly visited Libya, even before sanctions began to be lifted in 2003 and especially since, dramatic changes have occurred not only with respect to a wider availability of goods and services, but also a deep penetration of modern technology. This paradox of underdevelopment juxtaposed against advanced technology is a direct result of the sanctions under which Libya lived throughout the 1990s and part of the current decade.

One example of the great changes is Libya’s telecommunications industry, headed by one of Colonel Muammar Gaddafi’s sons, Mohammed Gaddafi. Libya skipped over landlines almost entirely and moved into the wireless and fiber-optic world. In fact, Libya’s mobile phone subscriber rate in 2005 was the highest in a study of eighteen Arab nations conducted by Dubai-based Madar Research.⁵ Libya even outdoes the United Arab Emirates⁶ by boasting two competing state-owned modern mobile phone networks, Libyana, which recently introduced 3G technology to the country, and Almadar. These companies are both owned by the Libyan General Post and Telecommunication Company⁷, but they compete against each other for customers by providing different pricing schemes and coverage areas.

However, despite opportunities in industries such as telecommunications, Libya’s real cash cow remains its oil industry, which accounts for 95 percent of its export revenues.⁸ The good news for potential investors in Libya is that recent developments in this sector will greatly improve the opportunities for profitable investments and successful operations in the country.

First, Libya’s National Oil Company ("NOC")⁹ changed leadership with Dr. Shokri Ghanem, formerly Libya’s prime minister,¹⁰ taking over as chairman of the NOC in March 2006. Dr. Ghanem, a graduate of Tufts University’s Fletcher School of Law and Diplomacy, is considered progressive and has aggressively moved to restore credibility to the NOC in his bid to increase Libya’s oil production to three million barrels a day by 2015.

Dr. Ghanem was one of the strongest advocates of the Exploration and Production Sharing Agreement ("EPSA IV")¹¹ bid round system which is currently in place, and it, along with resolving the lifting of sanctions, is considered one of his greatest achievements as prime minister. Now, as head of the NOC, Dr. Ghanem continues to champion the need "for transparency and fair competition by both local and foreign companies" ¹² during Libya’s EPSA IV licensing bid rounds. The NOC website¹³ is part of a wider government initiative, also started by Dr. Ghanem during his premiership, which gives all Libyan governmental ministries a regularly updated presence on the Internet. The website is just one of the small but effective ways in which Dr. Ghanem has tried to emphasize this point through continuously updated and free-flowing access to information.

Second, there has been the creation of the Oil and Gas Council in September 2006, now known as the Higher Council for Oil and Gas ("Council"). The Council was established by General People’s Committee¹⁴ ("GPC") Decision No. 211/2006, giving the Council the role of monitoring, maintaining, developing, and protecting the Libyan oil and gas sector for the benefit of the country, as well as giving it a supervisory role over the NOC with respect to financial, organizational, and other such issues affecting the NOC. This decision was later amended in November 2006 (GPC Decision No. 250/2006), changing the name of the Council, and further clarifying and delineating the role of the NOC by giving it the most flexibility to address concerns over time.

The Council’s creation marks a major shift in Libya’s oil and gas policy. It is hoped that the Council will streamline the work of the NOC, de- spite the fact that the November 2006 decision seems to limit the Council’s role further than originally anticipated. Ultimately, it is hoped that the Council’s creation will ensure a higher standard of efficiency and commercial benefit to the country’s oil and gas industry. Those benefits, if realized, should help foreign investors, since regulations affecting the oil and gas sector can be passed more easily, allowing for prudent changes related to exploration, production, and management to be made quickly.

Third, there has been the NOC’s selection and subsequent announcement in September 2006 of the finalists chosen for the third round of EPSA IV license bids for exploration and production blocks. Seven U.S.- based oil exploration companies, including four Texas-based firms— ExxonMobil, ConocoPhillips, Marathon, and Pioneer Natural Resources— made the cut of forty-seven finalists from an original list of seventy bidders that submitted proposals in late August. The finalists are bidding for the exploration rights to forty-one blocks, which are expected to yield highly profitable oil discoveries. The forty-seven finalists will submit bids in a sealed envelope by hand on December 20, 2006, with final winners expected to be announced in January 2007.

But have these exciting developments been matched by appropriate developments in the legal framework in Libya? In 2006 there have been some important legal developments related to foreign investment in Libya. One of the biggest developments relates to another GPC decision¹⁵ passed earlier this year. This decision cuts the minimum investment under Libya’s Foreign Investment Laws Nos. 5¹⁶ and 7¹⁷ from $50 million to a much more manageable and risk-averse LYD 5 million (approximately $3.8 million). This minimum investment capital is further reduced to LYD 2 million (approximately $1.5 million) where the investment is a fifty-fifty partnership between a foreigner and a Libyan national. Furthermore, a foreign investor may now borrow up to 50 percent of its investment capital from local Libyan banks.

The reduction in minimum start-up capital for foreign investors and the ability to borrow at least half of the capital from Libyan banks has had the obvious effect of encouraging more foreign investment in a country that has been closed to such investment from the United States for more than fifteen years. Because of the political and investment risks involved, Libya’s previous minimum capital investment hindered smaller investors from entering the marketplace. The reduction has spurred in- vestment in 2006, effectively breathing new life into the Libyan foreign investment sector. The Libyan government estimates that, so far, there has been approximately LYD 4 billion (approximately $3.06 billion USD) of foreign investment in Libya since 1997. The lowering of investment hurdles will undoubtedly increase that number in 2007.

Another significant change relates to foreign ownership of Libyan companies. In July 2006 the GPC passed a decision¹⁸ providing for the creation of a new type of Libyan company. Called a Mushtarika, this type of company allows foreigners, for the first time, to participate in up to 65 percent of the shareholding of the company, thereby allowing the foreign entity to maintain control of the company. Furthermore, the board of directors may be comprised of a majority of foreign directors. The new company organization contrasts sharply with the old Joint Stock Companies, in which foreigners could only own a maximum of 49 percent of the shares and the board of directors was required to include a majority of Libyan directors. This marks a major change in the way foreigners can do business in Libya.

The Mushtarika company can be established to carry out any unified activity (as opposed to a plurality of activities), except for retail, wholesale, and import activities. Therefore, it should be possible to establish a Mushtarika company as, for example, an oil services company. The minimum capital of a Mushtarika company is LYD 1 million (approximately $768,000), at least a third of which must be fully paid up upon incorporation, with the remainder being paid within five years of incorporation. The Company Registration Department at the Ministry of Economy is due to start accepting registration applications for Mushtarika companies from January 1, 2007. Mushtarika companies, however, may not carry out exploration and production activities. That type of activity is generally carried out under the framework of the EPSA IV agreements with the NOC. The general practice for U.S. companies such as ChevronTexaco and ConocoPhillips has been to set up a branch office pursuant to Law No. 65/1970, GPC Decision No. 3/2005 and GPC Decision No. 13/2005. This branch office is an extension of the foreign company in Libya (rather than a stand-alone Libyan entity) and is permitted to carry out only those activities contained in the law (namely GPC Decision No. 13/2005). Permitted activities that relate to the oil sector include: exploration for oil, drilling and maintenance of oil wells, and geological studies.

There are still many hurdles for U.S. investors going into Libya. It is not easy to enter the country, with visas taking months to obtain, and many allegations of corruption are still made. Additionally, Libyans are still trying to overcome the gap between the country’s desire to open up to foreign investment and the isolationist thinking that prevailed before sanctions were lifted. Libya has attempted to ease some of those concerns by passing laws that make it easier for investors to enter the market. In the oil and gas sector, the NOC has introduced public bidding for exploration and production rights through EPSA IV to make the process fairer and more transparent than ever before in an effort to restore confidence and credibility to the Libyan oil and gas sector. It is hoped that with the passage of each new Libyan law related to the commercial sector, U.S. investors will see that the direction Libya is taking is one toward an environment in which foreign investors can be more confident that the law will uphold their rights.

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